The Price of Time: The Real Story of Interest

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In the year of Bastiat’s death, a final pamphlet appeared. In ‘What is Seen and What is Not Seen’ Bastiat tells the parable of a merchant, Jacques Bonhomme, whose shop window is broken by his careless son. Neighbours thought that it wasn’t all bad news. At least repairing the window provided employment for the glazier, who could spend the money on food and other sundries. But Jacques Bonhomme now had less money to spend, says Bastiat. Here, Bastiat is urging readers to consider the broad consequences of any economic action, not just its effect on a particular beneficiary: Our low-interest trap is characterised by stagnation and growing inequality – and it hasn’t even saved us from spiralling inflation. In ancient Babylon, new reigns were traditionally marked by debt jubilees. With a wounded Prime Minister limping towards the exit, perhaps it’s time for the next leader to look to the lessons of post-crisis Iceland, and offer a fresh start. The warning by Borio and Lowe that authorities should be alert to the dangers of speculation – and the moral hazards that result when bad decision-makers get used to being rescued – is a constant theme running through the book. Pierre Joseph Proudhon (1809–1865), French socialist and political theorist. (Photograph: Bridgeman)

This book started out well. The first half walks through a relatively chronological look at use of debt and interest through history. associated with a variety of adverse outcomes, including short-termism, the diversion of resources into

This was correct in a sense, according to transportation economist Hubert Horan: ‘What Uber has disrupted is The second horseman is bloated asset prices. Again, think especially of the societally corrosive effects of unaffordable housing or, more generally, of the increasing concentration of financial assets in the upper percentiles of wealth, whose relatively low marginal propensity to consume further depresses economic growth. After all, if you direct income to poor people, they will only blow it on food and shelter. Reserve Bank of Australia governor Philip Lowe’s cautionary paper 20 years ago seems prescient in the current climate of rising inflation. Photograph: Mark Baker/AP Earlier generations of economists, who considered the problem of interest more deeply than their twenty-first-century counterparts, had no doubt as to its importance. For Böhm-Bawerk, interest was ‘an organic necessity’. Irving Fisher called interest ‘too omnipresent a phenomenon to be eradicated’. In similar vein, Joseph Schumpeter stated that interest ‘permeates, as it were, the whole economic system’. The author of Das Kapital, an avowed enemy of interest, agreed with this arch-apologist for capitalism. In a phrase evocative of the ancient world in which a charge for lending was first recorded, Marx writes that ‘usury lives in the pores of production, as it were, just as the gods of Epicurus lived in the space between worlds.’ be argued that, notwithstanding the failure of the Mississippi System, Law’s banking successors have been Ben

people’s wealth. Up to this date, bond yields had only dipped below zero on a couple of occasions, and that was In his debate with Proudhon, Bastiat pointed out that time had value. The leading writers on the subject, Böhm-Bawerk and Fisher, believed that interest was intrinsic to human nature: humans are naturally impatient creatures and the rate of interest expresses their time preference. fn2 Fisher’s contemporary, the Swedish economist Gustav Cassel, author of a fine introduction to the subject, likewise insisted on the ‘absolute and unconditional necessity of interest’.²⁷ Before the reader’s patience wears thin, it is time to start our story. Because China’s yuan is indirectly dollar-denominated, it, like an Argentina, is vulnerable. Federal Reserve rate hikes, like the modest ones in 2013, triggered Chinese currency flight. (One can only wonder with the current Fed hikes are going to do to China.) When a rich man presents himself at the bank, he will be told: You are solvent, here is the capital, we lend it to you for nothing.In existence pretty much since recorded human history, it has been one of the most hotly debated topics. It has piqued the ‘interest’ not only of businesses, financiers and governments, but also of religious institutions who have reviled the concept and mandated the wrath of God to discourage the practice. Yet, Interest has survived kings, wars, religions, economic models, and so on.