A puzzle about compound interest led Jacob Bernoulli to the number e
Put one dollar in an account paying 100 percent a year and you end with two. Add half the interest at mid-year and you get 2.25. Jacob Bernoulli wondered what happens if interest is added ever more often, and the answer he found is the constant e, one of mathematics' most important numbers.
Credit is older than coins by thousands of years. Sumerian records from around 3000 BC already show grain and metals being lent systematically, and the first written evidence of compound interest, charging interest on earlier interest, dates to about 2400 BC, at a yearly rate near 20 percent. One theory traces the idea to loans of seed or livestock, which could multiply and so seemed to justify a return. In the early second millennium BC, the Laws of Eshnunna fixed a legal rate on deposits of dowry.
Religious authorities pushed back hard. Ancient Jewish law prohibited usury. In 325 the Council of Nicaea barred clergy from lending at more than one percent a month, and later councils extended the rule to everyone. Thomas Aquinas condemned interest as double charging, billing someone for a thing and again for its use. Medieval thinkers also argued that lending produced nothing, unlike farming or smithing, and nearly all Islamic scholars read the Quran as forbidding interest. Jurists devised workarounds such as the Contractum trinius. Attitudes softened in the Renaissance, when borrowing increasingly paid for productive business rather than survival.
Economists have explained interest in several ways. The School of Salamanca saw it as a reward for the lender's risk of default, and in the sixteenth century Martín de Azpilcueta added the idea of time preference: people value a good now above the same good later, so lenders deserve compensation for waiting. Knut Wicksell's 1898 book Interest and Prices built a theory of crises on the gap between natural and nominal rates. In 1847 the Banque de France became the first central bank to try steering rates by managing the money supply.
In the late twentieth century, interest-free Islamic banking grew, replacing fixed interest with profit-and-loss sharing in which the lender invests as a partner.
Source: Interest (economics)
