time to be valuable . Wilson then provides a new definition of interest : “ Usurye is also saide to be the price of tyme , or of the delaying or forbearing of moneye .”
The Value of Time
If one believes that time belongs to God , as both Thomases did , then usury or interest is illegitimate . However , if one believes that time belongs to man , an altogether different picture emerges . The notion that time has value is of ancient origin . A fragment of the Greek orator Antiphon ( 480 – 411 bc ) states , “ the most costly outlay is time .” Five centuries later , Seneca the Younger reminds his friend Lucillius that time is precious because man is mortal and his days are numbered : “ embrace every hour ,” he advises , “ the stronger hold you have on today , the less will be your dependence on tomorrow .”
Unlike Thomas of Cobham , Seneca doesn ’ t believe that time is God ’ s property . Seneca ’ s view of time as man ’ s most precious possession resurfaces in the Renaissance and , of course , in Benjamin Franklin ’ s Advice to a Young Tradesman , “ Time is precious . Time is money — Time is the stuff of which life is made .” Franklin goes on to overturn Aristotle , offering a modern capitalistic view of money and interest : “ Money is of a prolific generating Nature . Money can beget Money , and its Offspring can beget more , and so on .”
Why is time valuable ? Because man is mortal . Time is running out . Man is naturally impatient . He values present enjoyments above future ones . Thus , he requires some compensation to forebear current pleasures . In the 18th century , French economist Anne-Marie Robert Turgot argued that a bird in the hand was worth two in the bush . A sum of money today and the same sum in the future couldn ’ t possibly have the same value , by this reckoning . For Turgot interest was “ the price given for the use of a certain quantity of value during a certain time .” Or the difference in value between current and future money .
The time value of money exists in all societies and in every type of economy . But it is especially important within a capitalist system . In fact , in France until the 18th century , the word interest was synonymous with capital . What we call capital only has value because it produces a future stream of income that is discounted ( using an interest rate ) back to a current value .
Valuation
The time value of money shapes our world . As the great economist and projector John Law wrote in the early 1700s : “ Anticipation is always at a discount . £ 100 to be paid now is of more value than £ 1,000 to be paid £ 10 a year for 100 years .” Without a discount rate , an apple in a hundred years ’ time would be worth the same as an apple today . An obvious absurdity . A discount rate is the essential input in any act of valuation . Lower interest rates result in higher valuations and vice versa .
In 1719 , Law conducted a great financial experiment in France , where he founded a central bank that issued paper money and reduced interest rates to 2 % by increasing the money in circulation . His famous Mississippi Company soared to a valuation of 50 times earnings . As Law said at the time , the company ’ s value was justified by the low prevailing rate of interest . Alas , this scheme failed . Law ’ s moneyprinting fueled inflation , confidence was lost , the paper money withdrawn and the bubble collapsed . A lesson that unfortunately was lost by modern economists and policymakers .
All great speculative bubbles in history have occurred at times of “ easy money ,” from the tulip mania of the 1630s through to the current day . Up until last year , interest rates were at their lowest levels in history , resulting in the so-called “ Everything Bubble ”— bubbles in stock prices ( especially tech stocks , meme stocks and special purpose acquisition companies or SPACs ), in real estate around the world and in a variety of other assets ( venture capital , cryptocurrencies , NFTs , vintage cars , etc .). It was , as Warren Buffett ’ s partner Charlie Munger said , the most extraordinary period in financial history .
Production
Production takes place over time . The level of interest influences the length of production processes or what we call the
“ payback period ” or “ hurdle rate ” for new investments . When interest rates are high , investors demand a quick payback and when rates are low a longer payback is acceptable .
The 19th century American economist Arthur Hadley linked interest to the survival of the fittest . Interest , he said , “ helps the natural selection of the most competent employers and the best processes , and the elimination of the less competent employers and worse processes .” Interest thus spurs what Joseph Schumpeter called “ creative destruction ”— the essential feature of capitalism . As James Grant of Grant ’ s Interest Rate Observer says , interest sets the tempo of production — at higher interest rates ( when there ’ s a higher price on time ) things move more quickly .
In my view , the ultralow interest rates of recent years thwarted the process of creative destruction , slowing the tempo of production . We witnessed the appearance of so-called zombie companies — inefficient companies whose low returns on capital serve to undermine productivity growth .
Furthermore , capital has flowed indiscriminately into long-dated investments ; principally , real estate around the world . And into venture capital on Silicon Valley , which has financed ever more preposterous businesses : autonomous cars , space tourism and , lately , crypto ventures , such as the FTX exchange , which turns out to have been a fraud . Silicon Valley investment over time turned into to a silly con , so to speak .
Risk Taking
Interest was described by Ferdinando Galiani , an 18th century philosopher , as the “ price of anxiety ,” or what could be called the price of risk . Galiani reasoned that all lending produced anxiety in the part of lenders , for which they needed compensation . Put another way , interest is like an insurance premium paid against the risk of loss .
What we find is that extremely low rates offer an inadequate protection against loss . Furthermore , they induce investors to take more risk to maintain their
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