What determined Interest Rates on Bills of Exchange?

An English Bill of Exchange dated 1810.

Image courtesy of the British Museum Trustees.

 Interest rates on bills of exchange could fluctuate considerably. These rates depended on several factors: the prevailing market rate, the particular usage of the bill, the riskiness of the transaction, or the familiarity and strength of the connections involved in the exchange. Main commercial hubs which connected long-distance trading, often featured more favourable rates. Merchants frequently borrowed money through bills where interest rates were low, and sold where rates were high. In this way, complex systems of arbitrage evolved.

The volume of bills which circulated also affected interest rates. Since bills of exchange were used to raise funds and manage credit, and not just finance trade, the volume of bills circulating at any one time could also exceed trade. The use of bills of exchange and differential interest rates could influence the direction of trade, and where specific markets developed. Great centres of exchange would attract the most popular and valuable of goods, since lower interest rates could make trade specialisation and exports more cost-efficient. Increased circulation of low interest bills of exchange created higher liquidity, making it easier to raise funds, or even settle debts contracted in other locations.

 It is easy to see how the interest rates on bills of exchange could be fascinating sources of information on multilateral trade, and the conditions of various marketplaces historically.