Edward Chancellor’s book , subtitled The Real Story of interest, starts with Hammurabi and continues to the present. He shows that interest is older than money and that the compulsion of governments to manipulate it is equally ancient. Interest has been seen as immoral by many religions, but has persisted because commerce is impossible without it.
The Book of Leviticus shows an amazing ignorance of rudimentary economics by proclaiming a debt jubilee every 50 years. What person capable of counting to five would make a two year loan in year 49 of the debt cycle? Interest is the time value of money, hence the book’s title. Interest is a charge for the use of money over a defined period of time. It is the price of time.
The history of interest rates has typically assumed a U shape over the course of numerous civilizations. Rates are high during the start of a civilization and fall as it matures, During its decline the rate rises. Chancellor observes that the rates of zero or even less that prevailed until just a few months ago give reason for considerable discomfort. One of the book’s central themes is stated in its introduction. Very low rates of interest benefit the rich and undermine the poor. The tendency of the affluent and governments to interfere with the natural rate of interest is both universal and irresistible.
The natural rate of interest has had many definitions. It seems best to define it as that which would exist absent interference by governments and rent seekers. Chancellor appears to have read everything written about interest and gives an interesting history of its use over the last three and a half millennia. The endnotes are copious and informative. The references are equally complete.
A word that appears in this volume with the rapidity of a machine gun is Bubble. Chancellor describes virtually all of them finally concluding that we currently are in a bubble of everything. A component of these bubbles is artificially low interest rates. The government benefits from lending money at low rates as do borrowers. Savers are crushed by very low rates and will stop saving and look for other sources of return which will likely entail greatly increased risk.
The growth of fiat money unattached from anything tangible allowed stable governments to discharge their debts by printing money unrelated to their national rates of production. This conjuring is most pronounced in the United States as it has, at least for now, the world’s reserve currency. That artificially low rates of interest inevitably lead to inflation has been known for centuries. Yet the titans of industry (loosely defined) and their shareholders continue to petition for it.
Throughout the more than 300 pages of this book, Chancellor repeatedly invokes the shade of Frederich Hayek with just a few a mentions of his name. Hayek’s dictum is that the economy is too complicated and variegated for any man or group of men to fully comprehend its nature, much less how it would respond to artificial manipulation. Hence it is best to leave it alone as much as possible and to pass laws and regulations that are designed to treat everyone fairly, as much as possible, while interfering in the execution of trade and commerce to the smallest degree consistent with the suppression of crime and fraud. Hayek emerges as the dominant intellectual forces in the book’s conclusion – see below.
After the financial crisis of 2008 governments passed so many regulations (tens of thousands of pages) that financial writer James Grant quipped central banks are printing rules almost as fast as they’re printing money. The history of interest is the committing of the same mistakes over and over again. Central bankers seem to have avoided the study of history with determined rigor.
The hubris of central planners is so ingrained that no failure or bubble can dissuade them from their certainty that they can manage the economy such that it will be better and fairer than if left to itself. That driving interest rates to zero, or less in the case of Europe and Japan, is a road to ruin seems not to be on their map.
The “Great Wealth Bubble” was the result of the low interest regime imposed on the world by its central bankers. The top 1 percent wallowed in wealth while the 99 percent struggled with weak income, unaffordable housing, and excessive debts. That interest rates of less than 5% are seen as a threat to the economy shows how misshapen markets have become under the aegis of the central bankers. Interest rates of 5% or more have been the rule for most history.
But if you think that the financial condition of the West and its congeners is fragile, Chancellor’s section on the Chinese economy will regrow the hair on a bald head. The country has become a land of repression, corruption, and infrastructure investment that has destroyed economic value. China is populated with ghost buildings and zombie enterprises. Capital has been misallocated on a scale as bad or even worse than that seen during the zenith of the Soviet Union. Debt has grown to mammoth proportions and yet the country is still relatively underdeveloped. Household debt doubled during the decade of 2008 to 2018. The national debt is 250% of GDP. China’s military may be a threat to the rest of the world, but its economy is not.
Chancellor’s Conclusion is titled The New Road to Serfdom. He starts by noting that only Germany has resisted the urge to borrow and spend. The section focuses on Hayek’s insight that “Money is one of the greatest instruments of freedom ever invented by man.” Chancellor worries that governments and intelligence agencies are moving to a cashless world that will destroy the last vestiges of privacy and that this world will be overseen by central bankers. We have blundered into Hayek’s Road to Serfdom with no guiding plan save expediency. The more we blunder the more systems fail. Moral hazard is everywhere. Hayek declared that democracy abhors stagnation, and now democracy is threatened.
What should we have done during the great financial crisis of 2008? Chancellor outlines the example of Iceland. The small country did everything opposite to what the US did and emerged quickly and in far better shape than the rest of the West. Admittedly it’s a very small country, but Hayek said that economic principles were valid everywhere.
Chancellor’s book, despite its detail into the fiscal history of the world, is very readable. If you would understand the parlous economic condition of the entire globe reading the book will provide a very good start. The Price of Time concludes with the last paragraph of Hayek’s Nobel Prize lecture:
The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society – a striving which makes him a tyrant not only over his fellows, but which may well make him a destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.