interest

The Columbia Encyclopedia, 6th ed.

interest

interest, charge for the use of credit or money, usually figured as a percentage of the principal and computed annually. Simple interest is computed annually on the principal. Compound interest, paid by some savings banks, computes the interest on the principal as well as on any previous interest that has been added to the principal.

Such charges have been made since ancient times, and they early fell into disrepute. In Greece, Solon forbade selling men into slavery for unpaid interest. The Jews, the Christian Church, and Islam forbade interest charges, or usury, as it was called, among their own groups. The merchant princes of Italy and elsewhere evaded such restrictions, even though the medieval churchmen considered money barren, or unable to produce wealth. Gradually the distinction was made between low interest rates and high ones, which came to be known, and condemned, as usury. England in 1545 removed the prohibition on interest charges and fixed a legal maximum interest; other countries followed.

In modern economics, a number of different theories regarding interest have been influential. The classical theory of interest, developed by Adam Smith and David Ricardo and expanded by others in later years, posited the interest rate as the force which balanced savings with investment. Marxist economic theory argued against the classical view that saw interest rates as a function of natural market forces, contending instead that interest was purely exploitative, because no service was rendered and it benefited only the capitalist class.

Abstinence theory, developed by Nassau Senior and later expanded upon by Eugen Böhm-Bawerk's productivity theory, argued that interest was a reward for saving money (in an interest-earning bank account) rather than spending it on commodities. Greater returns were available to those who saved, and interest rates were the deciding force in saving or spending. Irving Fisher advanced productivity theory by adding human capital to the understanding of interest rates. He explored the willingness (or lack thereof) of individuals to give up their present income for a future income, which may be significantly greater, as an important factor in the decision to invest. John Maynard Keynes took a much different approach, arguing that interest rates were a sort of reward for giving up liquidity, and varying interest rates were the significant force in a decision to invest. This new model was fundamental to the understanding of fluctuating interest rates, stepping beyond the focus of classical economics on equilibrium rates.

In recent years, the problem of inflation has been the paramount issue for interest theory. In the United States, the individual states are responsible for setting a legal rate at which debts may be assessed if they have come due and remain unpaid, and for setting the maximum rate allowed in a contract. In 1981, when rates soared to record highs, many legislatures increased or abolished such maximum rates in order to attract lending and credit card businesses and the potential employment they could offer residents. In Great Britain legal interest rates are not fixed by the government, but courts can determine whether a given rate is injurious.

High interest rates can dampen the economy by making it more difficult for consumers, businesses, and home buyers to secure loans, as happened in 1981 when the prime rate—the rate that banks charge their best customers—climbed past 20%. Economists differed over the causes of such extraordinary rates, but inflationary expectations, federal budget deficits, and the restrictive monetary policies of the Federal Reserve System were important factors. Interest rates fell in the latter half of the 1980s and stayed low into the 2000s.

In 2001–3, during recession and subsequent slow growth, the Federal Reserve lowered its short-term rates to levels (as low as 1%) not seen since the 1960s and late 1950s, but the low rates produced the desired economic growth only gradually. In mid-2004 the Federal Reserve began steadily raising rates until mid-2006, when the short-term rate reached 5.25%. When problems with some securitized mortgages cascaded through the economy, making obtaining loans and credit increasingly difficult and expensive and driving the economy into recession, the Federal Reserve again dramatically lowered its target short-term interest rate, to 0.25%, from Sept., 2007 to Dec., 2008 and held the target rate there into 2010.

See D. Dewey, Modern Capital Theory (1965); D. Patinkin, Money, Interest, and Prices (1989); C. Rogers, Money, Interest and Capital (1989).

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

interest
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.