“Interest is the rental price for borrowing money – or goods and resources,” says Lars Fredrik Øksendal, an economic historian at Inland Norway University of Applied Sciences.

Interest rates have been with us for a very long time, he told sciencenorway.no.

“If you go way back in history, the interest is in seed leasing,” he said.

Lars Fredrik Øksendal says the level of interest in Norway is high now because Norwegians have so much debt.

In ancient Mesopotamia – today’s Iraq – archaeologists have discovered clay tablet after clay tablet that discusses trade. “Amil-mirra must pay 330 units of barley grains to the owner of the tablet at harvest,” reads a typical 3,000-year-old inscription.

“If you lend someone seeds, you expect to get something more in return, a rental price for the seeds you have provided. It’s compensation for giving up on something for a while,” he said.

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Expectations to get something back

Historians believe that the fact that animal herds increased as animals reproduced could be one explanation for the interest rates. In the same way, seeds multiply naturally over time. So it’s perhaps unsurprising that people expect something more in return than what they have lent.

Since most of the earliest discovered clay tablets relate to transactions and commercial activities, it is reasonable to assume that people have enjoyed doing business for a long time. And the invention of interest was fundamental to the development of advanced societies and economies.

“Interest is in many ways the prerequisite for commercial loans. If a person couldn’t make money by ‘lending money’ — if it was, in fact, an actual loan — we can assume that far fewer people would have engaged in this practice,” explains Ola Innset.

Innset is an economic historian at the BI School of Business and says interest rates and large-scale lending are a relatively new phenomenon, despite their ancient precursors.

“Until the late Middle Ages, interest and making money with money was both controversial and often forbidden,” he said.

Jesus Expelling the Merchants and Moneychangers from the Temple, painted by El Greco.  According to Matthew, Jesus is said to have complained that 'My house will be called a house of prayer.  But you are making it a den of thieves.

Jesus Expelling the Merchants and Moneychangers from the Temple, painted by El Greco. According to Matthew, Jesus is said to have complained that ‘My house will be called a house of prayer. But you are making it a den of thieves.

religious taboo

At times, several major religions have considered it taboo to lend money and charge interest. In the Middle Ages, the Catholic Church considered the interest of other Christians to be a sin. A separate term has emerged for demanding unreasonably high interest rates – usury.

In Norway, until recently, there was a “ban on usury”, but it was lifted when a new criminal law was introduced in 2002, because the politicians who passed the law believed that the ban to charge unreasonably high interest was adequately covered in a section of the law on price caps.

“In the Middle Ages, taking out loans was largely related to necessity, for example after a bad harvest, and it was often considered morally wrong to earn money in such a situation,” Innset said.

The religious taboo against charging interest lives today most strongly in the Muslim world, where several Muslim countries have developed distinct forms of banking that are not based on interest.

“But the rise of capitalism has given people a completely different view of credit and therefore interest as something productive that can lead to growth,” Innset said.

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Modern savings and interest

Interest made it much easier to transfer large sums of money from the wealthy to others who wanted to invest, but didn’t have enough money themselves. It was a good investment for others to invest in – and part of the profits came in the form of interest. Win-win.

Bold investors and explorers drove the colonial era. In Amsterdam, Lisbon or Seville, groups of merchants finance themselves and send ships to sea towards Indonesia. If the ships returned loaded with spices, everyone involved would have made enough money for the rest of their lives. This way of doing business was also central to the Industrial Revolution.

“But investments don’t have to come from private capital. With the rise of democracy, states have had the economic and organizational muscle to lend money themselves and to regulate commercial lenders,” Innset said.

Enter central banks

“Central banks were ultimately created to bring more order to the monetary system itself. These banks became tools for government policy in the 20th century. Since central banks issue money, it gives states power over money,” Innset said.

Central banks – the Norges Bank in Norway’s case – determine the general level of interest rates in the economy. They do this by setting a “key interest rate” that all commercial banks must use.

“As we, unlike medieval farmers, now live in indebted societies, the interest rate is very important,” he said.

If the interest rate is high, people buy less – fewer people take out loans for cars and housing, and more people leave their money in the bank. This reaction is used to “cool” the economy.

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Growth and rebuilding

After World War II, Norwegian public banks such as Husbanken, the National Housing Bank of Norway and Lånekassen, the Norwegian State Educational Loan Fund, were established to lend money at low interest rates for specific purposes. Moreover, there was a clear “low interest rate policy” to encourage growth and contribute to reconstruction.

In the 1970s and 1980s, interest rate setting and central banks became more independent of politicians, meaning politicians had less power over money.

Back at the Inner Norway University of Applied Sciences, Øksendal explains that the current interest rate policy is somewhat special.

“The interest rates that we are currently experiencing are not historically very high, but they are problematic because there was a huge build-up of debt during the low interest rate period,” Øksendal said.

Since the 2008 financial crisis, and especially during the era of the coronavirus pandemic, there has been more money in circulation. This happened because the central bank gave private banks increased credit on their loans.

This makes it easier for banks to lend more money when times are tough for individuals and businesses. Then there is the danger of a country’s currency becoming less valuable due to inflation, although inflation has long remained low due to globalization and China’s cheap production.

But if a lot of money has been printed, it will eventually impact the economy. Currently, this policy has led to inflation in stock markets and property prices. So there is a lot of debt.

“That’s the big deal,” says Øksendal.

Translated by Nancy Bazilchuk

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Read the Norwegian version of this article on forskning.no

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