Ferdinando Galiani , an 18th century philosopher , described interest as the “ price of anxiety ,” or the price of risk .
In Das Kapital , Karl Marx wrote , “ Usurer ’ s capital impoverishes the mode of production , paralyzes the productive forces instead of developing them , and at the same time perpetuates the miserable conditions .”
James Grant , editor of Grant ’ s Interest Rate Observer , described interest as the “ universal price .” writings of modern economists specializing in inequality , such as Thomas Piketty , the best-selling author of Capital in the 21st Century .
My own take is rather different . Ultralow interest rates benefited the haves at the expense of the have-nots . Those who owned houses , stocks and shares saw their wealth climb as interest rates sunk . US household net wealth rose to an all-time high at the end of 2021 as interest rates fell to an all-time low . Bankers , hedge fund managers and senior corporate executives earned fortunes thanks to their access to cheap capital and the inflated asset prices resulting from ultralow rates .
However , for those who didn ’ t own a house or other investments , low rates made it much more difficult to get onto the housing ladder , or to acquire savings for investment . It ’ s a little-known fact that the less well-off keep much more of their wealth in cash ( which they must do for precautionary purposes , in case they lose their job ) and thus suffered most the decline in deposit rates . To make matters worse , their own cost of borrowing didn ’ t fall after the global financial crisis but actually climbed , as banks sought to tighten lending standards to so-called subprime borrowers . A double whammy .
The idea that easy money promotes inequality is supported historically by the fact that the appearance of the richest people in history has occurred at times
when interest rates were at a low ebb ; for instance , Jakob Fugger in the early 16th century , John Law in the 18th century , John D . Rockefeller in the Gilded Age and , more recently , Elon Musk . The rise in US income inequality over the past four decades has roughly tracked ( inversely ) the decline in long Treasury yields .
What Are We to Make of All This ?
First , that like it or not , interest ( or time preference ) is an indispensable , unavoidable part of the human condition . It has been around since the dawn of history and will always be with us . Interest is essential because it allows people to transact over time .
Second , whether we know it or not , interest enters into every economic calculation ( Joseph Schumpeter ). It is an omnipresent phenomenon ( Irving Fisher ). “ Usury lives in the pores of production , as it were , just as the gods of Epicurus lived in the space between worlds ” ( Karl Marx ). Interest is the “ universal price ” ( James Grant ). Interest gets into all the cracks ( Jeremy Stein ).
Third , capitalism as an economic system cannot function without interest . As shown in recent years , the disappearance of interest has been associated with the appearance of asset price bubbles and the weakest period of economic growth since the Industrial Revolution . If we attempt to do away with interest , we must accept a planned economy . But remember that one reason the Soviet Union failed was because the system lacked interest rates to guide the allocation of capital .
Finally , the period of ultralow rates has left the financial system and economy in a perilous state ( a state of “ intertemporal disequilibrium ” to use jargon ). One function of interest is to control inflation . The return of inflation has been accompanied by rising rates , which are causing great disruption . Last year , some $ 30 trillion of wealth evaporated in the bond and stock markets . In the first half of this year , several US banks failed . Real estate markets around the world are in trouble . And it seems this painful process of transition has further to run .
Edward Chancellor is an award-winning financial journalist . Currently a columnist for Reuters Breakingviews , he has also contributed to many other publications , including the Wall Street Journal , MoneyWeek , New York Review of Books and the Financial Times . He is the author of Devil Take the Hindmost : A History of Financial Speculation , which was a New York Times “ Notable Book of the Year ” and The Price of Time : The Real Story of Interest , from which this article has been adapted .
www . MoAF . org | Summer 2023 | FINANCIAL HISTORY 25