Lessons from Real Interest Rates Since the 14th Century
An Interview with Paul Schmelzing
Paul Schmelzing Susie Pak
In this new series with contemporary historians , Financial History Editorial Board Member Susie Pak interviews Paul Schmelzing , whose work exemplifies the meticulous , historical research that economic historians are doing in the academy .
Schmelzing received his B . Sc . in Economic History from the London School of Economics before completing his Ph . D . at Harvard University , where he was also a research assistant to economists Carmen Reinhart and Kenneth Rogoff and was advised by economic historian Niall Ferguson . In 2016 , he joined the Bank of England as a visiting researcher , where he began his research on long-term real interest rates culminating in his paper , “ Eight Centuries of Global Real Rates , R-G , and the ‘ Suprasecular ’ Decline , 1311 – 2018 .”
In 2021 , the Museum of American Finance , the Fordham University Gabelli School of Business and the CFA Society NY hosted a panel discussion on real interest rates since the 14th century with Schmelzing , then a postdoctoral research associate at the Yale School of Management ; James Grant , founder and editor of Grant ’ s Interest Rate Observer ; and Richard Sylla , former MoAF chairman and professor emeritus of economics at the NYU Stern School of Business .
To introduce his work to the audience of Financial History , Pak spoke to Schmelzing , who is set to join Boston College as an Assistant Professor of Finance , and also the Hoover Institution , Stanford , as a research fellow , about how he got interested in the history of long-term global real interest rates and why it is important for investors and policymakers today . This interview has been edited for length and clarity .
Susie Pak : Can you talk about yourself and how you arrived at the project of studying long-term global interest rates ?
Paul Schmelzing : If we really go back to the beginning , I finished high school [ in Germany ] in ’ 09 , which is around the time when the great financial crisis really got underway . Just before graduation , I did an internship in the German Bundestag ’ s Finance Committee in Berlin , where the policymakers started seeing the headlines and sensing that something was wrong with the financial system . That was also exactly the time when Ken Rogoff and Carmen Reinhart ’ s book , This Time is Different , came out . I was watching all these policymakers in the middle , who were taught for years and years that there could never again be a Great Depression , no more financial crises , because we live in an efficient market system where risk is perfectly allocated around the world and there ’ s no need to study historical financial crises anymore — it is taken care of by models and by algorithms .
The applied study of finance — through the lens of history and past precedents — made so much more sense than studying financial crises or finance through the lens of just mathematics and pure algorithms and models because , otherwise , you ’ re losing track of the underlying people and the underlying non-linearities and the chaos that is involved in economics and finance . I became strongly convinced of that historical long-run approach to not just financial crises , but finance in general because I felt it was completely vindicated by real events , by what we were seeing every day in the headlines and in the German financial system and , increasingly , in the global financial system .
During my Ph . D . work , I was seconded to the Bank of England , and I arrived there in 2016 when from the policy side , the new big debate was all about interest rates . Why are interest rates so low ? Why have they not recovered much more strongly after the ’ 08 crisis , after the rebound in growth ? What is going on with the zero lower bound ? Why do we see negative nominal interest rates ? All the textbooks said this could not happen . So here was another case where the textbooks , where the consensus view in the models , just didn ’ t make sense . Reality was overtaking the textbooks because suddenly we were seeing negative nominal interest rates . And so that led me to look at the historical side , given my background , and what has been done on the interest rate side . What can we learn from the from the long-term historical perspective ?
Pak : At the MoAF / Gabelli School program , you mentioned that when you were in school , you would read the Financial Times and look at the data on which that was based . Can you talk a little bit about that and about how it was so short term ?
36 FINANCIAL HISTORY | Summer 2022 | www . MoAF . org