Financial History 142 Summer 2022 - Page 40

also need robust price data . People like Bob Allen have collected these reference price series from the early 14th century . Prior to that , we can collect more and more nominal rates , but we can no longer create proper consumption baskets to calculate real interest rates .
Also , the more relevant point probably is that the late 13th century is when consolidated sovereign debt comes into existence in the first place . Venice consolidates its long maturity debt in the year 1282 . In many ways , that ’ s the birth of sovereign debt . Very quickly , other governments copy these arrangements ; Florence , Genoa and other city republics copied the Venetian model . And from the early 14th century , a really big group of issuers issued consolidated long-maturity debt . From then on , it makes sense to aggregate different issuers and try to calculate these global real rates . And so , overall , I ’ m covering over 80 % of advanced economy GDP since the Renaissance based on Angus Maddison ’ s definition of advanced economies over time . Now , as historians know very well , when you talk about an issuer like Germany , you ’ re really talking about 150 different issuers .
Pak : Or , like Italy .
Schmelzing : Exactly . Or like Italy or even France . Of course , in the latter you have a powerful central government in the 14th and 15th century . But during certain periods , most of the sovereign financial market action is below the level of central government by rich dukes or by the regional lords or whatever . So , to arrive at these headline country level data points , ideally you want to take into account everything that happens on both the central level and on the level below that because these different levels interact all the time . The king raises money through the dukes or other levels of government . I group it into eight countries for simplicity purposes , but it ’ s really dozens and dozens of different issuers over time that you can trace , where you can rebuild a longer time series for individual entities and include , say , just small principalities with less than 100k population .
Pak : What are the drivers of these real interest rate trends over the long term ? And what are the trends ?
Example of a sovereign debt contract , between the Fuggers and the English Crown , dated July 10 , 1546 .
Schmelzing : I would say that the first big result is really the idea that there ’ s nothing like a steady state , natural interest rate such as the one that existed in the 1960s or 1970s that would be representative of some sort of natural level . Instead , what we find is that global real interest rates continuously declined since at least the early 16th century . For over 500 years , global real interest rates have continuously and through different fiscal , different monetary regimes , different political entities for all these different places , spatially and temporally , declined . I would say that goes against a significant share of the literature that came out over the last 10-15 years , which always , as I mentioned earlier , operated with the assumption that there is a constant level of interest rates that prevails in mature economies .
The idea here is that the 1970s and 1980s are not really the inflection point we should be focusing on . It has very little to do with the fundamental dynamics of real interest rates . What ’ s happened since the 1970s is , in that sense , a return to a trend that has prevailed in the international financial system for 500 years . What we are seeing for the last 40 years or so is not an aberration or a weird departure or a weird overshoot . No , it ’ s a perfectly natural development where global real rates go back to their declining trend . It has always prevailed in the international financial system . And if we had this kind of long-run time series before , it should have surprised nobody what we are seeing over the last 20 – 30 years . It is perfectly normal what ’ s happening . And I think one interesting idea is that someone in the 16th and 17th centuries would always have concluded that we would be debating about the zero lower bound negative nominal policy rates around the time of the early 21st century because that ’ s what ’ s in the long-run trend line — it ’ s zero .
Pak : You said that these have clear implications for monetary policy and how impactful it can be . Can you talk a little bit about that ?
Schmelzing : The idea of monetary policy since the 1990s focuses on inflation targeting . But the interest rate remains the key monetary policy tool that is supposed to achieve these monetary targets . That monetary policy , or combined with fiscal policy perhaps , is able to influence the structural level of interest rates in the economy and the long-term secular level of interest rates . The problem is that if you look at the very long-run record , it ’ s not really consistent with the empirical picture that we have seen . Why ? Because as financial historians know , central banks have not actually been
The National Archives , Kew ( TNA ), E 101 / 601 / 16 .
38 FINANCIAL HISTORY | Summer 2022 | www . MoAF . org