Why do we have interest rates? I am quite serious about this question. I know the Fed can influence them but we had interest rate even before we had the Fed. What are the most recent economic theories and any good books on this topic?During the gold standard interest rates were quite stable - I read somewhere the long rate was 3.5% (on UK consols) during the whole of 19th century and there was apparently no need for interest rate (and currency) derivatives traders and quants... So perhaps if we went back to the gold standard we could again have stable rates and this forum would discuss just commodity and equity derivatives (and most of us would do something more useful).Would interest rate be zero if the progress in the society stopped, i.e. if GDP growth were zero (or should it be GDP per person)?

Interest rates before the Fed were to a large extent run by JP Morgan. During the gold standard interest rates were quite stableNot in Europe. Even in Britain yields (as opposed to rate coupons) shot up when the value of British government debt slumped when it was feared there might not be a Britain at various points. WeI was at a meeting in the British Treasury recently, and upon the wall was a Confederate Government Bond with two coupons clipped from it. These were revenue bonds, hypothecated upon taxes on various future government cash flows including import duties and cotton. Even though this was a relatively high risk bond, the coupon was only 5%, which was high for then, but hardly distressed yields. (It was a dull meeting ok ?). The value of these bonds dropped like a stone of course as the Confederacy failed, so the implied interest rate went up quickly. I read somewhere the long rate was 3.5% (on UK consols) Not was, is. My software does 1/2 the job of calculating the official prices of British government debt for the Treasury to give to Reuters/Bloomberg each night, and Consols are still there, as is War Loan, and a whole menagerie of rump stocks, et al.Consols were the first "tradeable" government bonds, being issued by Charles II to pay for rebuilding after the great fire of London. Bloomberg refers to them as "Perpetual" which is not actually quite true.The vagaries of interest movements have meant that the yields on these is vaguely near par currently. Hard to say exactly, 275 million doesn't make for a liquid market.during the whole of 19th century and there was apparently no need for interest rate (and currency) derivatives tradersNot even remotely true. King & Shaxson (my firm) was founded as I recall in 1862. At that point one was required to wear a Top Hat to trade, and we still have one of them in the chairman's office. The others went to Nigeria (long story). A related firm, the lamented Gerrard & King / GNI have been doing interesting things with interest rates for 150 years.As for currency, you may recall that a certain Mr. Christ got all upset about them some 2000 years ago.So perhaps if we went back to the gold standard we could again have stable rates and this forum would discuss just commodity and equity derivatives (and most of us would do something more useful).Gold does not lead to stable rates, however they do shift the distribution from a (usually) greater than zero, to one which has a mean at, or near to zero. This means effectively negative interest rates occur. This is one step short of deflation.I take it you know that 5% deflation is a lot worse than 5 inflation ?