The Price of Time is a recently published book by Edward Chancellor. Its subtitle is “The Real Story of Interest” which makes it very topical as bank interest rates are being raised in both the USA and UK in an attempt to damp down inflation. After an era when interest rates have been at their lowest levels in the last 5,000 years, and have even gone negative in some countries, a historic review of the impact of interest rates through booms and busts is certainly worth reading. But this is a difficult book in some ways.
It’s too long at 400 pages for one thing for all but the most avid reader of economic history. Why do publishers (in this case Allen Lane part of Penguin) insist on their authors padding out their manuscripts to such length? This book would have been much better at 200 pages than 400. It attempts to cover too much ground and in too much detail while not getting the key messages across.
It covers some ancient history but really gets going in a good explanation of how Scotsman John Law rescued the French economy in the 1700s by lowering interest rates and issuing paper money – similar to the modern Quantitative Easing. But thereafter that economic experiment ended in tears. The book covers the economic booms and busts in the Victorian era forward through the depression in the 1930s to the banking crisis in 2008, and the reaction of Governments.
The book attempts to answer the question of whether there is a natural rate of interest, i.e. one that would apply if the Government did not intervene as they have persistently done throughout history – from the imposition of usury laws, through debt forgiveness to modern central bank base rates.
Why is interest paid? Because an investor holding cash needs some return for the uncertainty of being repaid when money is lent. If the risk is higher then the interest paid has to be higher to attract lenders. In times of economic uncertainty such as wars, interest rates are raised.
Historically when there was a surplus of cash in the economy, interest rates would fall as there might be more lenders than borrowers. High interest rates are likely to reduce economic activity as borrowers are put off from investing in new developments such as buildings or machinery. Low interest rates should encourage economic activity and the circulation of money as opposed to the hoarding of assets.
Governments have taken a stance in recent years that lowering interest rates must be good to maintain a healthy economy but the result has been asset inflation. From stock market booms to house price inflation, if you can borrow money at very low rates it encourages speculation and the borrowing of money to buy assets.
Lenders also need a return to cover the future value of the money lent. If inflation is high, then interest will be high. Recently the Bank of England has had an inflation target of 2% while interest rates have been less for many borrowers. That made little sense. Inflation has now got out of hand but real interest rates are still effectively negative. That is essentially irrational.
The book covers the history of Government and central bank interventions in interest rates and the economy, often with unintended consequences. In that regard, it is a good education on what should or should not be done. One message is clear – artificially low interest rates are as bad for the economy as high interest rates.
The book is very well researched with numerous apposite quotations. I would recommend it to anyone interested in economic history and the trends that have made the modern world. But it could do with being shorter and having a more defined structure.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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