The opening of restrictions against interest rates
A major event in the history of money was the removal of interest caps such that people could lend each other money at different margins. Freedom on interest rates meant that the difficulties of borrowing and lending were reduced significantly and therefore many people owning a business and in their personal capacity would be able to get rich by getting the necessary capital for their business. Interests act as incentives for lending money and without them, many people would prefer to stay with their money instead of giving it out. By giving it out, they are exposing themselves to the risk of default and they would not recover their money should anything go bad.
On the other hand, the interest rates, when left unhindered allow a lender to gauge the ability of a borrower to pay back and then use that as a basis for accessing the risk of lending. The release of restrictions on interest rates increased the role that bankers and other financial intermediaries made in supporting the economy and the circulation of money. Initially, the gap between the rich and poor was low but after allowing lenders a free reign on interest rates, their speed at getting rich increased while many people also fell into the burden of paying loans serially. Interest rates made debt lucrative for businesses and lenders and they were necessary instruments for affording a lifestyle that a consumer needed. The release of interest caps would be the initial move that eventually changed the financial markets to make them what they are today.
According to Locke, money is raised through borrowing and lending. The release of interest rate caps exposed money to the laws of demand and supply. Lenders could increase interest rates if they withheld the supply of money and borrowers could get low-interest rates if they reduced the demand for money. Speculation and inability to control all lenders or borrowers in the market meant that there would be competition among lenders to have the highest number of borrowers and therefore the highest returns from lending out money. Borrowers at the time were mainly businesses that sought to finance their operations and trade. Debt became a symbol of power and a measure of value and an extension of money. With free-flowing interest rates, debt became an asset that could be passed on. The asset could be banked.
The meaning of banking here is to place it in a status where one expects future payment to enrich by a particular margin. Thus, interest increases the propensity to the consumer because it led to the easement of lending by those who had money. As a result, it prevented the hoarding of money that would jeopardize the growth of societies and economies. It made way for expenditure to increase above savings, thus causing more people in society to become indebted. According to early takes on savings and expenditure, such as the thoughts on classical economics, savings enrich communities while spending improvises them (Locke, 1692). Thus, the removal of lending rates and subsequent increase in expenditure would, therefore, lead to the impoverishment of the community based on these thoughts. However, with free interest rates flows according to the demand for money, and the variations in instruments for creating more money, economies have continued to prosper.
Consumer debt
Consumer debt trade was a new theme that changed the circulation of money in the economy. Charging interests on consumer debt based on the length of time available for repayment and the risk of repayment were subsequent development that enhanced the role of consumer debt as a major influencer in the circulation of money in the economy. Before the emergence of consumer debt as a segment of the financial sector, money circulation was very rigid and limited. The debt was mainly used for banking and corporate activities, while retailers and consumers relied on what today would mostly be referred to as overdrafts with limited or no interest.
Retailers lent to buyers only when they were sure that lending would lead to more sales. Lending in this case usually encompassed the shop owner and the customer. It would be in terms of letting the customer get goods or services and pay later. Therefore, whether the customer paid on the agreed date or delayed, the shop owner would still receive the same lent amount without any additional penalty. Lending in this nature was mainly peer-related as shop owners would have to conduct very thorough due diligence before affording a customer the loan option. By the 1930s, a credit-driven economy emerged were consumer debt became a viable sector for economic growth. Debts could be bought and consolidated. They could then be sold to investors seeking to cash in on the interest payments. Reselling debt would allow retailers to continue operating as though they had not issued any loans to customers (Hyman, 2012).
Securitization
Another major theme in the history of money is securitization, whose origin can be traced to the introduction of revolving credit or the flexible repayment with accumulating interest coupled with the breakdown of long-term consumer debt into tranches with different maturity for subsequent sale to investors. The move led to the lucrativeness of consumer debt as viable investment vehicles for pension funds, insurance companies, and many businesses seeking long term investment options tied to their claims periods. Profits by intermediary companies and banks helping to organize and facilitate the investments as well as the interest earned by investors increased to further compel more investors to get into the market. Eventually, financing activities surpassed manufacturing ones as the main driver of the economy. Money no longer became a limitation.
It was a matter of asking how much interest rate one would pay, as money circulation had been bumped up significantly. Lenders were no longer afraid to lend as they knew they would get away to dispose of the loan by selling it to other investors. Meanwhile, investors did not note the origin of the loan as keenly as they did its maturity. This eventually led to the securitization of loans, where any kind of loan in the economy was repackaged as a bond and sold. The loan market was very lucrative for investors and their demand increased to bring up more demand for the loans that would be packaged as bonds and sold to investors. Thus, the demand for mortgages shot up, as they were the prime instruments for securitization. Securitization ushered a new impetus to consume and was seen as a significant contribution to economic growth. It supported the thoughts by Bernard Mandeville’s “Fable of the Bees”, which noted that prosperity would arise from increased expenditure instead of saving (Keynes, 1936). Notably, this was the prosperity of the economy rather than that of the individuals.
References
Hyman, L. (2012). The politics of consumer debt: U.S. state policy and the rise of investment in consumer credit 1920-2008. Annals of the American Academy of Political and Social Science 2012 (644), 40-49.
Keynes, J. M. (1936). The general theory of employment, interest and money. Web.
Locke, J. (1692). Some considerations of the consequences of the lowering of interest and the raising of value of money. Web.