To figure this out, you have to imagine that we are on the gold standard and there is no federal reserve to create interest rates. The only people that loan money are people that have money. No fractional reserve banking or any government interference. So...you have $100k to loan to someone for a mortgage. Whats a fair interest rate that would make you want to loan money to someone that is competative with other people that would be loaning money. Remember...we are only using gold & silver, so there is next to no inflation. Well maintained houses do not go up or down in value. I would say between 10-20% depending on amortization and 20 years would be the absolute maximum amortization.
I'd suggest that a gold debt should be repayable at a rate of interest equal to the production of new gold. Which is 1-2% per year (payable in gold, of course, and the principal must be repaid in gold). That we have 5-6% mortgages today is a reflection that investors believe that money (ie: US dollars) will be produced (printed, etc.) at the rate of 5-6%/year over the term of the mortgage.
1-2% wouldnt make sense. At those rates, nobody would loan money for a house and everyone would want to put a mortgage on their house. Supply & demand would not allow for a 1-2% interest rate. The market would force interest rates so much higher because everyone would want a mortgage and there wouldnt be enough gold to give everyone one. 500 or so years ago when the world used gold & silver, profit margins for money lending were very high. Usually about 70% per year. I'm pretty sure gold wasnt being produced at that pace. At that rate, homes were bought outright and there was no financing usually.
It's absurd enough that people are compelled to try comparing the '27 Yankees to the '75 Reds. But, 500 years ago? Jeez...
You ask a very good question. Rates would not be all that high, but the terms would be on the order of 50%+ down payment and 5 year max term.
Keep in mind that you would get repaid in gold, not dollars that have, over the previous 30 years, depreciated. The interest rate would only need to be slighty higher than zero (when measured in gold). If it was zero, of course, the owner of gold would simply retain their gold and not lend it. (this is why there's not much lending right now in the economy either -- because interest rates are zero. Once the Fed starts raising interest rates, lending will expand significantly!) How would that happen? If the interest rate of all loans is greater than the growth in the supply of gold, then those loans essentially would be unrepayable. Would the 'market' force interest rates to be so high that debts are unrepayable? I doubt it. 1-2% is a very decent rate of interest if you can be satisfied that the money that will be repaid, in principal and interest, will be a constant store of value. 70% per year? Are you smoking crack? That's impossible. I think you're a little bit confused. At a gold interest rate higher than that of the expansion of the gold supply, debt would become completely unrepayable.
That is not an uncommon rate territory for pawn broker / jewelry shops for short term loans that lend on gold and jewelry as collateral.
But they're lending dollars, to be repaid in dollars. They're not lending gold, to be repaid in gold + gold interest. Big difference.
I can see where you have gotten confused. In your example, you are figuring that 100% of all the gold that exists is being loaned by banks. You are not including all the people that own gold and spend gold on a day to day basis. You are not factoring in the velocity of money. The one who is lending that money and making interest is also spending that money on products that are being produced by the people borrowing. For instance...Its just you and me left on the planet (have to scale this economy small to show you) Also...neither one of us dig for gold. I have 136 oz of gold and you have nothing. I loan you 100 gold oz to start a business and I charge you 20% interest amortized over 4 years (so you pay me back 36 oz of gold per year). You start a sandwich store. I go to your store and spend 36 oz of gold on your stale sandwiches every year. After 4 years you have paid me back. Now...I have no more income and dont want to use my savings to buy your stale sandwiches anymore so you have no more customers. So you have to borrow 100 oz of gold again to start another store and pay me 20% interest. This time you open a pizzaria. Again I spend 36 oz of gold per year on your cardboard crusty tasting pizzas. This goes on until we die. So you see...it doesnt matter how much gold is dug up every year. I will charge you whatever I want in interest and you will raise or lower your prices to reflect whatever I am charging you. Thats what we call "the market". If you are smart, you will overcharge me for your moldy cheese pizzas and make me broke, then you will become the moneylender and I will have to open up a restaurant and pay you interest.