Eighteenth-century Irish interest rates – market failure in a booming economy

The purpose of this paper is to provide the first time series of interest rates in the Irish mortgage market of the eighteenth century.1 This time series, when combined with new data on the investment returns from land and other types of investments, sheds light on the determinants of interest rates in economies without a central bank. This paper is relevant to two key global economic history issues for the period: the influence of institutions on economic growth and the timing of the ‘Great Divergence’ between Western Europe and the rest of the world.2 However, the primary questions dealt with are how did Irish rates compare with English ones and how did they influence the development of the Irish economy? Interest rates are ‘an important index of the quality of the institutional framework’ and this paper examines the development of Irish rates and shows how they compare to other economies.3 The paper demonstrates that Irish interest rates were consistently higher than equivalent English ones and that the Irish mercantile and industrial sectors were handicapped as a result. This spread is not attributable to risk premia caused by differences in institutional effects but rather by the relative risk/return hierarchy of different investment types, notably by the exceptionally high returns on Irish land. Credit market failure was the result for much of the century as the unrealistic usury maximum caused credit rationing. There was also a sustained strong correlation between English and Irish rates.4 However, this correlation was not due to direct market integration, since the English and Irish markets were segregated, but rather the two markets were reacting in the same way to external stimuli such as wars.