The Price of Time

Jeff Deist: First of all, congratulations on your new book The Price of Time. It was fantastic.

Edward Chancellor (EC): I’m glad you enjoyed it.

JD: I ask all authors this question, especially authors of weighty books. Was it worth it, in terms of the opportunity cost in your own life?

EC: Not financially [laughs]. I bet most of them say that. Heaven knows why people write books, really. The best you can say is that, you’re building up your own human capital and you’re making some contribution to civilization. And I work in the world of finance and investment, and on the whole, it pays for me to spend time building up my human capital. You never quite know when the payoffs come. Now that I’m toward the end of my career, it doesn’t really matter that much, anyhow. So, I wrote this earlier book called Devil Take the Hindmost: A History of Financial Speculation. That paid off, and it created career opportunities for me. I don’t think this book will, but perhaps it will have some influence on policy. I think of it like this: it’s a sort of testament to what’s gone on. It’s harder now to shovel these things under the carpet because people will be able to come back to this book and say, Can you answer these questions? So, we’ll see. I don’t regret writing it. One thing you’ll find about people who write books is that they’re tremendously relieved when they’re done.

JD: You received a nice review in the Wall Street Journal. How about reviews in the UK and Europe?

EC: Yes. So, it probably won’t particularly surprise you, given the polarization of the press today and in particular the polarization of economic questions, that the so-called right-wing press—the Wall Street Journal, Telegraph over here, Spectator over here, Times over here—they all liked the book, almost uncritically. The Left has completely ignored it. As I said, my previous book, Devil Take the Hindmost, actually sold hundreds of thousands of copies, established me reasonably well. Admittedly, it’s been a while, but I find it a bit strange that the New York Times, Washington Post, Guardian deigned to look at The Price of Time. And then you’ve got the policy-making media, the technocratic media, the Financial Times and columnists—they didn’t like it. Martin Wolf at the FT said that I obviously wished for a state of permanently high unemployment. You can imagine that argument. And both royal family economists reviewed my book alongside the latest offering by Ben Bernanke, coming down decisively in favor of Bernanke, which is fair enough, but what both of those reviews failed to do, needless to say, is to address my argument. It’s easier to disparage persons you disagree with than to address their arguments.

JD: I did not find the book ideological per se.

EC: You know, subjects on interest have always been fraught with political disagreements. And I suppose in the end, interest is always going to be a question of the distribution of income and wealth, and therefore people with different ideological positions have always had different views about the subject of interest and very strong views. If you’ve ever read Eugen von Böhm- Bawerk’s Capital and Interest, it’s a very splenetic work. It’s quite comic, in a way, how fiercely he denounces people whose views he disagrees with. My position, as I say at the outset of The Price of Time, drawing on a comment that Irving Fisher makes in his Theory of Interest, is that a lot of these different theories of interest are not actually as contradictory as they might appear.

JD: I liked that quote. Fisher said competing theories of interest are not in fact “mutually annihilatory.”

EC: I didn’t want to have a very clear ideological axe to grind. My own training is as a historian, not as an economist. That was my training at the university. But then later I worked as a banker and an investor and as a financial journalist. You can also say I’m an empiricist. Having said all that, yes, as you know, the book inclines quite strongly toward the Austrian interpretations, and many Austrian economists have slightly different takes on the subject. I suppose that Schumpeter’s view was perhaps sitting to the side of everyone else, but as you know, I’m a big fan of Hayek, and a big fan of Schumpeter.

Some of the ideas of this book were hatched years ago, when I was asked by the Institute of Economic Affairs, which, as you know, I contributed to. They were putting together a book on monetary policy in 2004–05 and asked me to write something, and I wrote a piece comparing Hayek’s arguments that price stability was not a sufficient goal or sound goal for monetary policy against the free monetarist view that price stability was the be-all and end-all of monetary policy. This was written in 2004. I said, We’re running a great experiment because they said, We’ve got this tremendous credit boom going on, real estate bubble. Hayek would have screamed blue murder, and Friedman was quite onboard with the policy, if you remember . . . Run a great experiment and we’ll see what the outcome is, and perhaps one of these different schools of thought will be validated by the experiment. An anonymous peer reviewer wrote back saying, If members of the Austrian church wish to be heard, it behooves them to relate more to the mainstream. I withdrew the piece. It didn’t make me lose faith, so to speak. It actually rather hardened my view.

JD: You left Cambridge and Oxford with an advanced degree in history but ended up working for the investment bank Lazard. Did your time in mergers and acquisitions plant the seed of a “financialized” economy in your mind, that investment bankers move money around but don’t produce much?

EC: To put it like that, yes. The reason I left corporate finance was that it didn’t seem, on the whole, a particularly useful function. I’m not saying that there shouldn’t be a market for corporate control, but if you see it from the side of the investment bankers, it’s largely . . . it’s solely about generating fees, regardless of whether the deals are necessary or not. And there was one French partner at Lazard’s in my time who when asked by one of his junior people what price he should advise the clients to bid, turned and said, “The price is right which hurts our clients.” You have to be pretty cynical to stay in an environment like that your entire career.

JD: Capital markets are supposed to be noble. They’re supposed to allocate capital to its best and highest uses, and make us wealthier and happier as a result.

EC: I’ve been thinking more about this that perhaps I didn’t spell it out clearly enough. You know how in modern finance theory—Modigliani, Miller—leverage doesn’t add value, it just increases volatility and therefore you shouldn’t really have financialization? You shouldn’t really have an incentive to leverage buyouts. Whatever advantage you get from leverage in a buyout case is offset by liquidity concerns and volatility around solvency. You shouldn’t have financial engineering if the interest rate is at the correct level. And in a way, I think that the financial engineering of the last thirty years or more has been pushed, and that’s pushed further and further by the very low interest. And that’s why you find people of the market-oriented persuasion like me coming to quite similar conclusions to the typical Marxist critics of Wall Street.

JD: The critique is that Western monetary systems create an unjust class of wealthy elites.

EC: I think they do. As I argue in the book, the finance sector is too large. Obviously it serves a function, but traditionally in the US, I think it ran 3 percent of GDP or below, probably the same in the UK, and in both of those countries, the financial sector is now more than three times that level. And as the finance sector rises, I think it becomes a bit of an incubus on the rest of society. It ceases to provide a benign function. Or better, it does continue to provide a benign function, but there are malignant effects from a bloated financial system. These become, I think, stronger as the system, as the finance section, grows larger. And then, as I point out in the book, the periods of very strong financial growth, whether the Gilded Age, the 1920s, or more recently, are also those associated with a very strong rise in inequality.

JD: Absolutely. I love the framing at the outset of your book, the Proudhon versus Bastiat debate in the French National Assembly. It’s still relevant today. The essential question remains whether interest rates should be set by fiat or by the market. Proudhon sounds an awful lot like central bankers since ’08.

EC: I think so. It was a gift to me when I came across the Proudhon-Bastiat debate because it did spell things out so clearly, and what’s interesting is that Proudhon very clearly comes from the long-running tradition of criticizing interest, but then sort of brings that critique of interest forward by going to the idea of a national bank providing more or less free credit. And then, Bastiat—being a brilliant and insightful economic thinker, considering unintended consequences and the claim of who would benefit and who would lose—Bastiat says that is absolute nonsense, that the poor man is not going to benefit. The poor man would lose income on his savings, but it’s the rich man who will be able to go to the bank and borrow very cheap because his credit’s good. I have a friend who’s a hedgefund—ex-hedge-fund—guy, and he told me seven or eight years ago that his mates were getting ready to buy him out. I can’t remember what they were, but high-yielding businesses, assets with regular income streams on extremely low cost of funding. And they were guys who were, I suppose, billionaires or near billionaires who were just minting it and it’s fair enough that they weren’t breaking the law, but the system had been tilted very much in their favor and as you know, the likes of Bernanke were sort of obtuse. They simply refused to recognize it. They claimed that what they were doing was helping the man on the street and that it would benefit him. I think it probably is true that unemployment was somewhat curtailed by central bank interventions in the immediate aftermath (2008, 2009) of the global financial crisis, but a whole load of other problems came to pass, to fester. . . I suppose that sort of goes back to the 1930s experience and the birth of Keynesianism, which is a period of unemployment and is seen as the highest and only evil and everything else is ignored.

JD: I know you’re friends with Jim Grant and you have a section in your book devoted to Walter Bagehot. Bagehot is sort of a lost figure these days. Jim Grant is one of his biographers.

EC: Bagehot’s a good financial journalist, quite intuitive, has a brilliant turn of phrase. Bagehot’s comment is that the financial world tends to fall to pieces when interest rates fall below 2 percent; as he puts it, John Bull can stand many things, but he can’t stand 2 percent. He says that when interest rates fall below 2 percent, people must either be less well off or they must be less secure, and what Bagehot understood was that people were choosing to be less secure. They probably wouldn’t realize it at the time, the security that they were sacrificing. So that’s the plus side of Bagehot. The negative side is Bagehot being associated with the so-called Bagehot rule and lender of last resort. I’m not necessarily against a lender-of-last-resort system. I’m against a financial system that requires a lender of last resort. And it’s amusing. I cite a contemporary of Bagehot’s, a former governor of the Bank of England, criticizing Bagehot’s arguments for a central bank action lender law, saying that it would create all sorts of moral hazard. If you then fast-forward 150- odd years, you can see that the principles of the original Bagehot rule of lending at high rates of interest against high-quality collateral for a short period of time have been more or less completely thrown out of the window. And we now have a system which is much more riven with moral hazard than in nineteenth-century England and which must therefore necessarily be more fragile.

JD: What about religious influences on the practice of charging interest rates? That could be a book unto itself. But you kept this pretty Western. EC: I discuss early in the book the religious strictures against lending and interest and usury in the Bible and then in ancient civilization. I didn’t really think that getting into the whole Islamic world was going to add very much.

EC: I discuss early in the book the religious strictures against lending and interest and usury in the Bible and then in ancient civilization. I didn’t really think that getting into the whole Islamic world was going to add very much.

JD: Some would claim we have usury in the US today. We have subprime borrowers, poor people who buy furniture or cars at or have credit cards with interest rates well over 20 percent.

EC: That slightly depends. As you know, from the Austrian view, the interest represents your time preference, and people’s time preference varies with individual acceptance times. I make the argument that a person who is getting paid the next day but wants to go out and have a great night before might be willing to pay 20 percent interest on an overnight loan and it’s not entirely crazy. Look at what happens to payday lenders—in particular, there was one in England, called Wonga, who was doing quite well. The archbishop of Canterbury, who is a sort of terse and sanctimonious figure, waged what came to be called the War on Wonga. This was an attack against all payday lenders. The archbishop instead proposed the church build up its own lending arm.

JD: Did they?

EC: The Church of England has made some of the worst investment decisions in the history of mankind. So, actually, if it had set itself up as some payday lender, I’m sure it would have failed spectacularly.

But Wonga failed in the end for not charging enough. I suppose if a business fails to generate a sufficient return, it’s hard to accuse it of usury. I think there’s another line by the English jurist William Blackstone where he says that charging money for a loan is known as interest by those who accept it and usury by those who don’t. In a way, the definition of usury is an interest rate. It’s actually rather subjective. It’s what an individual feels is an unfair rate of interest.

JD: Indeed. As for the poor, I think you make a good case in the middle section of the book that none of this financialization by central bankers has helped them. Average people can’t use a simple savings account. They have to go out and chase yield. Most average people are not wired to do that.

EC: I think it’s worse than that. The less money you have, the larger your precautionary reserves are going to be as a share of your total financial wealth. And in plain English, that means you’re going to have to hold more cash to deal with emergencies. And therefore, you’re not going to be going out and investing in some private equity fund. What you saw in the last decade is people sitting on cash that was yielding nothing. I think an estimated $500 billion a year was lost in interest, and we know, as I say in the book, that a lot of that interest was lost by well-off people who were more than making it back elsewhere. But if the poor had had relatively more of their resources in cash, they would have been relatively worse hit. And the other point I make is that the banks at the same time were told to tighten their lending standards, so they turned the screws on the subprime.

JD: In recent years, we’ve talked a lot about negative interest rates, but as you point out, we’ve had negative real rates in the US and UK for whole decades in the second half of the twentieth century. I’m not sure most people realize this.

EC: The period from the mid-sixties through to the early eighties, was one of negative real rates, and really, the time since the Fed cut rates after the dot-com bust in 2002 has been a return to negative rates. We haven’t had, until the last decade, such high inflation as occurred in the 1970s, even with relatively low interest rates. Real interest rates on average are more negative than they were in the 1970s. In other words, the depositor lost more money in the 2010s than in the 1970s.

JD: As an aside, would you rather live with the European Central Bank or the Bank of England? Are you glad to have the pound?

EC: I’m glad in principle to have the pound. I think the Bank of England is under extraordinarily poor management at the moment, and so, it’s not much consolation. I was reading today that the ECB is about to generate some massive losses, and that’s going to be huge. It will then come out who’s going to bear those losses. Is Germany going to pick them up? The German taxpayer? Are those losses going to be borne in relation to the public balances of all of the EU countries?

JD: How about the Greeks? (laughs)

EC: I know the Greeks will be paying.

JD: Your treatment of the US dollar in the third part of the book is superb. The dollar really has operated as a tool of imperialism. As Nixon’s Treasury secretary, John Connolly, said, “The dollar is our currency but your problem.” Ouch. America has enjoyed the privilege of essentially exporting inflation.

EC: Yes, and even before Bretton Woods. People have been critical of the gold exchange standard of the 1920s, in which basically US government liabilities were a substitute for gold in foreign exchanges. Bretton Woods—really, it’s the beginning of the dollar standard. You have the criticism of that system by Jacques Rueff. The “exorbitant privilege” of the dollar is when America can, in effect, run large balance of payments deficits, and the money comes flowing back, I don’t think in the long run it’s good for America, and it’s not very good for the rest of the world.

I refer somewhat to the Dutch disease. There was a period in the 1970s when the Dutch found some large offshore natural gas resources and the money that flowed into the Dutch economy from the gas resources was deemed to corrupt the economy. That was also true of Spanish gold and silver in the sixteenth century, and I think probably true also of the dollar. Look at the dollar standard, it’s nice to enjoy the benefits in the near term, but the question is, What happens in the longer period?

In the last twenty-five years, at the turn of century, America has largely deindustrialized and lost markets to China and, in effect, lost its strategic position relative to China, which looks like an epic mistake. But it all seemed fine when Americans were running these massive deficits and the Chinese were buying dollar securities and were sending the dollars back and buying more dollar securities. I think it was analyzable in real time; in other words, this is not just hindsight by us. It is almost driven by corruption in the body politic. Large businesses were happy to engage in this process because they could cut their costs and boost their profits in the near term. Even at the same time, they were making that long-term future vulnerable to the actions of the Chinese state. If they had read anything about Chinese history, they would have known that that was a foolish thing to do.

JD: Your chapter on Chinese financial repression was quite the cautionary tale. Did you write it before covid and all the draconian lockdowns in China?

EC: Yes, in a way. I was working around the time of the financial crisis and afterward for a Boston investment firm called GMO, and I took it upon myself to become the sort of in-house China expert, and so I’ve done a lot of work on China. At one stage, I was going to write a book on China, and then I didn’t really quite have enough specialist knowledge. And then I thought, Well, actually, many of the problems you see in China could also be explained by the distortion and corruption of interest. It’s curious; you read Chinese financial history and economic history, how the manipulation of money and interest have always been part of Chinese history, and that’s not surprising because China’s always been a powerful centralized state that’s disdained the merchants. So, in a way, yes, China has always been a cautionary tale in monetary and financial history.

JD: I particularly enjoyed the way you disabused readers of the vaunted Chinese savings rate. It turns out they juice their currency constantly and that rapid expansion of credit shows up as investment savings on one side of the ledger.

EC: Yes. Or that if you repress consumption, repress the income of depositors in the banking system, and you direct cheap savings to companies that then invest the money, you get an automatic rise in the savings rate, and if at the same time, you boost exports while suppressing imports, that appears to be what Bernanke would call a global savings glut. But I like the term of Claudio Borio, the economist who backed the Bank of International Settlements—Bernanke’s nemesis, really—who says it wasn’t a savings glut, it was just a banking glut.

JD: That’s an interesting way to put it. Do you worry these outright capital controls will become more common in the West?

EC: Yes, I do. I don’t quite know how the system is going to correct that. I think what we’ve seen in the course of this last year, it’s the early fault lines appearing, and they’re going to become more severe. And if what we’re looking ahead to is imposition of financial repression on a large scale, maintaining interest rates well below the rate of inflation, that’s okay if all countries have roughly the same level of inflation. There isn’t a particular interest in taking your money from one country to another. But wide disparities between countries, and capital flows will run from one country to another. And if that happens then you can only maintain your financial repression with capital controls. If the government wishes to take over private savings and direct them toward their own preferred uses, it’s much harder to do unless you have capital control.

JD: Is digital currency the mechanism for all of this?

EC: It could be. It’s conceivable that Switzerland could issue a standard digital currency that wasn’t going to track your every move, and we’d all rush into Swiss digital francs. But I think, on the other hand, that would also be grounds for imposing a digital currency. You know, digital currencies will be all right, but only our digital currency.

JD: On the last page of the book, you suggest that a rational monetary system in the future will need to be backed rather than fiat based, which could mean a role for gold in supporting a digital private currency. What would be your ideal?

EC: Well, the argument in the book is that we need to return to a world in which interest rates are set in the market, not by central bankers, because central bankers won’t have enough information and they’ll have their own preferences and they will make mistakes and we’ve seen they’ve made those mistakes. The current system does not work. There is cryptocurrency, but as I point out, a lot of cryptocurrency appears to be nothing more than Ponzi schemes. And a central bank digital currency [CBDC] in which the currency issuance is backed by government debt would come something quite close to the Chicago plan, wouldn’t it? Just in the CBDC mode.

I know you can’t leave aside privacy concerns, as they’re going to be the most important concerns, but if we leave that aside for the moment, if you had a CBDC that could only increase at a fixed rate, were constitutionally designed in that way, it would have, as I say, certain qualities of the gold standard. But the problem with the gold standard is there’s no real problem. The Austrians had some early insights into financial structures. The nice thing about a CBDC is it would suck up all deposits out of the banks, so you would actually end fractional reserve banking. We need to move to a different monetary system, away from fractional reserve banking. Fractional reserve banking allows the banker to create loans and earn the money on the spread, and then the system becomes dependent on the private banker’s monetary creation. And then the banker makes a whole load of mistakes, and his bank starts collapsing. Then he comes crying to the taxpayer that he needs a bailout and we all pick up the bill.

JD: Your term for commercial bank money creation is “fountain pen money.”

EC: We need to move away from fountain pen money. I’m very cognizant of Hayek’s comment that the invention of money is one of the greatest inventions for freedom of the individual in history, but having come through two-odd years of lockdowns, I think in this digital age, one’s pretty much aware that one’s freedom’s going to be taken away pretty quickly. So, you need to be wary.

JD: What do you think of the idea that as societies become wealthier over time and capital accumulates over centuries, we should expect interest rates to fall naturally? Even Marxists thought the capitalist thieves would have so much damn money that rates would have to go down over time.

EC: That’s quite right. I think there is an area where financial development probably does lower interest rates: the development of a banking system will bring down interest rates because, if you can imagine a world in which people stash their savings under their beds, when they move them into a bank, those savings become available as loans. So, I think that financial development is associated with falling interest, and we see that in medieval Europe, in Italy.

There is this argument—it was often referred to in Holland in the seventeenth century—that in a country with a very high savings rate and with a developed capital structure, interest would come down and people would then lend their money abroad. And that seems to be what happened in Holland in the seventeenth century and eighteenth century. But on the whole, capital wears out, so we save. And during the course of our lives, we save and in hard times we consume our capital. And the capital also needs replacing after a period of time. There isn’t any evidence to my mind that says a country like the US has been underinvesting; its capital stock has been aging, in the sense of not being replaced, and so I don’t think there is a long-term trend toward lower and lower interest. That was sort of the argument for the very low interest rates in the last decade, where you could draw a trendline over five millennia, with interest rates in Mesopotamia at 33 percent and suddenly get down to zero in 2010.

The trouble with all trendline analysis is it slightly depends when you start and when you end. The twentieth century saw the lowest interest rates, but it also saw the highest interest rates in history. It’s hard to think of it now, but under Volcker and in the aftermath of Volcker, US rates were pretty high in nominal and real terms. So these things move in cycles. They’re not very long, you know, I don’t see the long-term linear trend.

JD: Final question: Do you think the manipulation of interest rates—all the consequences from it—is one of the biggest untold stories of our time? It’s not headline news, despite all the extraordinary monetary policy we witnessed during both the Great Recession and covid.

EC: Yes, I suppose it is. You asked me at the beginning, Why does one write a book? And the reason I would write a book is if I felt that the subject hadn’t been adequately addressed. There is a lot of literature on interest over the centuries. All the writers, economic minds, have turned to it, some of them really not saying anything particularly interesting. Adam Smith wasn’t particularly insightful about interest. But yes, it did seem to me it was time to address it. The book seems to be selling reasonably well, but it’s not exactly a New York Times bestseller, so I’m not sure to what extent this subject catches the world on fire.

JD: We will use this interview to try to sell a few more copies!

EC: Well, you know, I’m pleased to have an association with the Mises Institute because I admire your work.

JD: Thank you, Mr. Chancellor.