According to Aristotle , usury was immoral because “ money was intended to be used in exchange , but not to increase at interest .”
In Advice to a Young Tradesman , Benjamin Franklin wrote , “ Time is precious . Time is money — Time is the stuff of which life is made .”
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 .” income . As Walter Bagehot said , “ John Bull can stand many things , but he cannot stand two per cent .” Bagehot wrote that “ If the old , and tried , and safe investments no longer yield their accustomed returns , we must take what they do yield , or try what is untried . We must either be poorer or less safe ; less opulent or less secure .” Modern research confirms this intuition . Easy money encourages “ yield-chasing ,” which leads to a decline in underwriting standards ( consider the proliferation of “ covenant-lite ” loans in recent years ) and rising financial risk .
Leverage
One measure of financial risk is leverage ( debt relative to equity or capital ). Interest is also the price of leverage . It appears that households , companies and governments target a stable debt-service ratio . Thus , as the interest rate declines they take on more debt . In the United Kingdom , for instance , the average household mortgage to income ratio is around two and a half times its level of the early 1980s . Government debt levels around the world have soared since 2008 .
Ultralow rates also encourage what is called financial engineering , as companies use debt to enhance returns , buying back shares ( rather than investing ) and acquiring other companies . Leveraged buyouts have proliferated in recent years . A corporate takeover boom , funded with low-cost debt , has contributed to the growth of monopolies with all their attendant ill effects .
Global debt levels are far higher than at the time of the financial crisis . As interest rates rise , over-leveraged entities are struggling . For instance , Woking Council , a UK local authority , is reportedly on the verge of bankruptcy , having borrowed £ 2 billion to finance local developments . The returns on those poor investments appear to be in the range of 2 %.
Saving
Interest has been described as a “ reward of abstinence ,” or an inducement to save . Interest compounds savings wealth , enabling people to retire at some stage . Ultralow rates punish savers — what the former German finance minister Wolfgang Schäuble called “ Strafzinsen .” Without an inducement to save , the UK savings rate in recent years fell to record lows ( people were deluded into believing they could live in retirement off the “ wealth ” effortlessly accumulated in their homes ).
Pension providers found that lower interest rates increased the value of their liabilities . Defined benefit pensions — which pay a certain guaranteed income on retirement — have disappeared ( except in the public sector ). Existing pension plans took greater risks to boost their income and went into the derivatives markets to buy long-dated bonds . Last September , the UK gilts market crashed ; those bonds that the pensions were exposed to , on a leveraged basis , fell 85 % in value , and the Bank of England was forced to step in to prevent another blow-up in the City of London . Thus , the inevitable consequence of the era of ultralow rates will be that future retirement will take place later in life and be less comfortable .
Distribution of Income and Wealth
For better or worse , interest always influences the distribution of income and wealth . Most attention is paid to excessively high interest , which fits in with socialist denunciations of greed and exploitation . Consider Marx ’ s description of usury in Ancient Rome , which he claimed enabled patricians to suck dry and enslave small producers and peasants . “ Usurer ’ s capital ,” he wrote in Das Kapital , “ impoverishes the mode of production , paralyzes the productive forces instead of developing them , and at the same time perpetuates the miserable conditions .”
Usury , Marx continued , “ does not alter the mode of production , but attaches itself firmly to it like a parasite and makes it wretched . It sucks out its blood , enervates it and compels reproduction to proceed under ever more pitiable conditions .” Such anti-usury views continue in the
24 FINANCIAL HISTORY | Summer 2023 | www . MoAF . org