"The History of Interest Rates" by Sidney Homer is a book wealth of knowledge for those curious about the bond market. Homer gathers data points across civilization, starting from ancient Babylon, Rome, and the medieval ages to the millennium. Some interesting takeaways: interest rates at the dawn of civilization were as high as 50%. And over the course of five millennia, we can see nation states' short-term and long-term rates fall to today's three to five percent. Interest rates tend to form a saucer-like graph, where they start high, crater, and then rise again for civilizations that fail. The US, for example, started at the colonial period with high rates and, over the past two centuries, has hovered as low as two to ten percent, inferring that creditors are still willing to accept low interest for the bonds of America. This book puts into perspective the health of nations in aggregate, in contrast to the daily alarmist noise, the infomercial economists, and speculators in today's media, both left and right, the optimists and the pessimists in daily life.

Here are a few quotes I highlighted while reading this book:

A famous Austrian economist, Eugen von Böhm-Bawerk, declared that the cultural level of a nation is mirrored by its rate of interest. The higher a people's intelligence and moral strength, the lower the rate of interest. He was speaking of free market rates of interest, not of controlled rates of interest. In his time, market rates of interest throughout the principal trading nations of the world were historically low: two and a half to three and a half percent for long-term prime credits.

There is, however, a great deal of evidence that most ancient loans were intended to run only a few months, or at most from one to three years. Rates were usually quoted at so much a month. Even loans secured on real property usually specified repayment in one year. Occasionally a longer period was specified, but there was no distinction of rates according to term. Long-term capital projects were not generally financed on credit, and states rarely borrowed. There were no large corporations. Some credits were in fact outstanding for years, but this was apparently due to regular renewal or to default.

"Of all kinds of capital," said Demosthenes, "the most productive in business is confidence. And if you do not know that, you do not know anything."

Few chapters in the economic history of a young nation are more astonishing to the ordinary mind than the stories of its monetary and banking legislation. The Constitution gave to Congress the power to coin money and regulate the value thereof. All money, however, not coined money. The Supreme Court declared in 1839 that the right to issue bank notes was common law and an occupation open to all men. The states might, if they wish, restrain and regulate their citizens in pursuit of this attractive occupation, but the federal government was not to be concerned. Monetary authority was thus divided: hard money was controlled by the federal government, paper money by private concerns regulated at the discretion of each of many states, with which the federal government was free to compete. Successful merchants had to become connoisseurs of banknotes, accepting only the best at par.

Interest rates through history have been subject to political controversy, and so they are today. During the 20th century, many persons impressed by the success of science in controlling the physical environment have urged the advantages of also controlling the economic environment. The old liberal doctrines of laissez-faire have given ground in most countries of the world and were at times abandoned altogether in some. When this happened, however, it soon became apparent that controlling an economy, unlike controlling the physical environment, required controlling possibly uncooperative groups of people. Trying to do this, especially in peacetime, met with a very understandable opposition wherever freedom is a political tradition. And as the 1980s demonstrated, even where it is not, various compromises have been achieved, based largely on the degree of control that people have been willing to accept or unable to avoid. But the issue of government controls, though much better understood now than it was a few decades ago, remains far from settled. It is important to this history because interest rates are among those prices most directly influenced by governments. No doubt, the ultimate verdict of history will associate some parts of the very wide swings of interest rates during recent decades with political doctrine. No doubt, also, the political issue of high or low interest rates will survive to occupy frequent headlines in the decades to come and will have its share in determining the future patterns of markets.

Short-term yields reached their extreme low points in 1940-1941 and rose thereafter, whereas long-term bond yields continued to decline until 1946. Thus, from 1940 until 1946, there occurred one of those rare periods when short- and long-term rates moved in opposite directions for several years. And as rates of inflation come down, so again, with a lag, do market rates and yields. In this new financial and economic environment, there is much more risk and uncertainty about the future value of money.

There were other contrasts. In this decade, Spain's cost of living doubled, while Portugal's cost of living rose only 9%. The dollar value of the Spanish peseta fell by 50 to 75%, while the dollar value of the Portuguese escudo was unchanged. These contrasts are significant because both economies were controlled by authoritarian governments.

Chart 1 provides a very rough sketch of the trends of minimum ancient Greek and Roman interest rates, though those were mostly traditional rates on short-term loans and thus were very different from modern long-term yields. A saucer-shaped pattern was followed by interest rates during the history of each ancient civilization. Rates declined under early centuries of development and expansion, bottomed out in the centuries of commercial activity, and finally rose again with the disintegration of social and commercial life. Chart 78, which is based on long-term interest rates in those nations forming what is often called Western civilization, reveals what could be the first part of a similar saucer.

(The chart refered in this quote is graphed in decennial points with the last date plotting on 2005. The FED has maintained a steady interest rate relative to its mandate)

It is almost as if the bubble of the late 1990s did not really end when the stock market began its steep decline in the early 2000s. Asset speculation just shifted from stocks to real estate in response to large declines in long-term interest rates. This is hardly a conundrum. The long history of financial bubbles often featured more than one asset class becoming a focus of speculation, either simultaneously or sequentially.