The Significance of Interest in Coordinating Economic and Financial Activities

Interest is considered the first financial innovation as it allows people to transact across time. This concept dates back to prehistoric periods when people would loan their livestock in exchange for interest. Economically, all activities including savings, investments, and consumption involve a time element that needs to be coordinated. The prevailing level of interest affects borrowing, consumption, investment decisions, valuations, and future yields. Understanding interest as the price of time is crucial for coordinating economic and financial activities, as highlighted by economic historians and theorists like Bill Gertzmann and Irving Fisher.