THE TIME: Mr. Schmelzing, the fall in interest rates annoys many savers. They argue in a new study that the interest falling since the Middle Ages. How do you find out how high interest rates were in the Middle Ages?
Paul Schmelzing: Through puzzle work. Records have to be analyzed especially for the period before the 18th century. Almost all major cities in the Holy Roman Empire of the German Nation had city registers in which the official business was kept.
TIME: How would you describe that?
Schmelzing: These are chronological overviews. Political negotiations and wars are documented there, but so are loans. In the old German imperial cities such as Speyer, Worms or Mainz, some of these registers date back to the 9th century.
TIME: You went there and looked at it?
Schmelzing: I have been in many archives personally, some of the printed registers can also be found in university libraries or online. I combined the information from the cities with information about the loans of the kings and princes, who from the early modern period were happy to borrow money from merchants or allies. This has resulted in a series of data going back to 1311.
TIME: What did a loan look like? There were no banks in many regions.
Schmelzing: Often there was not even paper money. Gold and silver were the basis of the international financial system. But you have signed loan agreements, as you do today. An example: The English King Edward III. committed in 1342 to repay 2,000 gold guilders to the merchant Simon van Halen within two years. Part of the treasury was pledged as security.
TIME: The church has in middle age Interest prohibited. How did you deal with it?
Schmelzing: In practice, it was often simply not adhered to. In some areas, the interest rate is openly mentioned in the loan agreements, in others it has been hidden. No interest is mentioned, but a fee for late repayment, which ultimately amounts to the same thing. It is also important to understand that the Vatican was one of the largest players in the capital market in the early modern period. And the popes quite frankly asked for and paid interest.
TIME: What is the result of your investigation?
Schmelzing: On average, the long-term real interest rate adjusted for inflation has declined by around 0.006 to 0.016 percentage points each year since the late Middle Ages. But there are always big fluctuations.
TIME: Where do they come from?
Schmelzing: They are often triggered by geopolitical developments. In the 14th century, real interest rates fell by almost six percentage points within ten years. The reason? The plague has wiped out a third to half of the population in some areas of Europe. The capital stock – houses, gold, plow crockery – remained unchanged. In a way, there was an oversupply of capital, which led to the price of capital, i.e. the interest rate, falling. In the 15th century, the church enforced that luxury clothing and excessive parties were prohibited. As a result, the savings rate goes up because people are suddenly spending less money – and the interest rate is falling.
TIME: Today, the central banks are responsible for the money supply. Does this affect interest rates?
Schmelzing: I actually suspected that, but my data do not support this thesis. The era of central banks began in the 17th century with the establishment of the Swedish Reichsbank and the Bank of England. Since the 1970s, currencies have also no longer been linked to gold or other precious metals. But there is no big jump in the time series – neither up nor down.